What is decentralized payroll?

Most companies that have all their employees working in the same location use a centralized payroll platform. This means everyone is paid using the same system on the same day, according to the organization's policies.

Decentralized payroll is a general term for a system in which employees are paid by their individual departments or, in the case of a global workforce—a growing reality, as a Deloitte survey found that almost 80% of respondents allow some form of remote or hybrid work—the entity that employs them on behalf of the parent organization. Instead of every employee receiving their paycheck from the same place on the same day, a decentralized payroll system involves outsourcing those processes to partners who take on the responsibility of paying workers, maintaining compliance, and managing taxes and other withholdings.

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How decentralized payroll works

Decentralized payroll works by distributing payroll responsibilities across multiple local partners rather than managing everything from one central location. Each country or region has its own dedicated payroll provider who handles local compliance, tax calculations, and payments.

This typically involves:

• Calculating pay, including local taxes and social contributions.

• Ensuring compliance with country-specific labor laws and regulations.

• Processing payments in the local currency.

• Serving as a local point of contact for payroll-related questions.

The parent company maintains oversight and provides the necessary funding, but it delegates the complex, on-the-ground processing to those with specialized local knowledge.

The benefits of decentralized payroll

Improved worker relations

Decentralized payroll systems place workers closer to the people who issue their paychecks. For example, when a company contracts with a local professional employer organization or employer of record, that company handles payroll and serves as the human resources contact for employees. In the event of a pay-related issue, workers have a local contact who understands relevant laws, customs, and culture and has the ability to solve the problem more efficiently.

More accurate accounting

Decentralizing payroll eliminates the need to build a single payroll department staffed with people who understand the intricacies of international regulations, such as varying social insurance costs that can account for 24% of compensation in the U.S. but less than 20% in many Asian countries. A decentralized payroll system that relies on local, in-country departments reduces the risk of errors or running afoul of the law.

Lower resource burden

Decentralized systems eliminate the need to invest in new payroll tools to handle international payroll. Varying standards among companies mean that an organization's existing approach to payroll may not be adequate to ensure compliance across borders. By assigning payroll responsibilities to local providers, there's no need to spend time and money on complex international payroll, mirroring a broader trend where businesses increasingly use nonbank providers for cross-border payments.

Reduced risk

If something goes wrong with the centralized payroll system, the ripple effect will impact every worker in the organization, no matter their location. A decentralized system reduces the risk of a catastrophic failure, ensuring that employees outside the central system receive their pay on time. This approach both streamlines the recovery and protects the organization's reputation.

Lower administrative burden

Decentralizing payroll means that the specific entity responsible for paying a worker is also responsible for managing administrative functions like maintaining demographic information or changes in worker status. For companies with international employees, this reduces the paperwork and administrative burden on a single payroll office and helps ensure better accuracy and responsiveness.

Challenges of decentralized payroll

Decentralized payroll isn't perfect. Managing multiple vendors across countries creates some real challenges you'll need to consider:

• Limited visibility: Data lives in different systems, making it tough to see your global payroll costs at a glance.

• Administrative overhead: More vendors means more contracts, deadlines, and coordination.

• Inconsistent experiences: Each provider has different processes, which can frustrate your team and employees.

• Security complexity: More vendors handling sensitive data means more potential security risks, a significant concern when global losses from payment fraud are projected to reach $400 billion over the next decade.

Key considerations for implementing decentralized payroll

Thinking about going decentralized? Here's what you need to get right:

• Vet your partners thoroughly: Look for providers with strong compliance track records in their local markets, as leading global firms utilize extensive professional networks and technology to drive compliance and quality assurance across more than 120 countries.

• Set clear standards upfront: Define reporting formats, communication protocols, and service level expectations before you start.

• Plan for data consolidation: Choose partners who can integrate with your existing HRIS or finance systems to avoid manual data entry.

Simplify global payroll with Oyster

Here's the thing about global payroll—it often feels like you're stuck choosing between simplicity and local expertise. What if there was a better way?

Oyster offers a unified global employment platform that gives you the best of both worlds. With our Employer of Record (EOR) service, you get built-in local compliance and payroll expertise in over 180 countries, all managed through a single, easy-to-use platform. For companies with their own entities, Oyster's Global Payroll solution automates and standardizes payroll runs across multiple countries, giving you central visibility while ensuring local accuracy.

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